Speaking a day after we decided to maintain the policy interest rate at 5%, Governor Tiff Macklem explores some key factors behind the decision. He also explains why the 2% inflation target supports a stable economy and greater prosperity for households and businesses.

Watch Governor Macklem speak to the Calgary Chamber of Commerce. Read the full speech.

Policy rate stays the same

We decided to hold our target for the overnight rate at 5% and continue quantitative tightening.

Higher interest rates are working to cool demand and return inflation to our 2% target. But we remain concerned about the persistence of underlying inflationary pressures, and Governing Council is prepared to increase the policy interest rate further if needed.

Inflation is still too high

In the July Monetary Policy Report, we projected that inflation would fall to around 3% this summer. Consumer price index (CPI) inflation came in at 2.8% in June and 3.3% in July. We’re making good progress, but monetary policy has more work to do to achieve our 2% target.

This is because when you break down the many components of inflation, a lot of volatility remains. Energy prices are lower than they were a year ago, but they’re on the rise again. Price pressures for things like furniture and appliances are also easing. But the costs of food, shelter and many services continue to rise faster and higher than normal. Prices for almost everything, including many necessities, are up compared with a year ago.

Overall, the prices of goods and services across the economy are still growing, so underlying inflation remains stubbornly above our target.

Demand is slowing

One factor that will help cool high inflation is slower growth in demand than in supply. This will also lead to:

• slower growth in labour costs
• normalized corporate price-setting behaviour

Last week, data showed that growth slowed sharply in the second quarter of the year. Growth in household spending slowed considerably, particularly in areas most sensitive to higher interest rates—like housing, building materials and furniture. Spending on services has also softened, and pressures on the labour market are gradually diminishing. These all point to monetary policy doing its job.

In contrast, wage growth hasn’t moderated much. We expect it will start to slow, but it will lag behind other labour market indicators. And while businesses tell us they are easing off on passing higher costs onto consumers, we need to see more progress to return to low, stable and predictable price growth.

We remain focused on our 2% target

Higher interest rates are needed to cool inflation, but we know this is painful for Canadians. Some are questioning why we are committed to achieving the 2% target.

The fact is that inflation targeting has worked well to stabilize our economic and financial system for the better part of three decades. Canadians can count on our commitment to the 2% target as a stable anchor for businesses, households and governments. This helps bring inflation down. Experience here at home and in countries around the world show that 2% inflation has worked to deliver solid and sustainable economic performance.

We review and renew our inflation target and monetary policy framework every five years to ensure it’s still relevant and effective. The next renewal is in 2026. Leading up to it we’ll undertake a thorough review of the framework and see how well the 2% target has served our economy.

Watch Governor Macklem answer questions from the media following the speech.